We have been thinking about setting a safe harbor 401(k) plan and have heard that there are some pretty stringent timing requirements depending on some of the provisions we select.
What are the key decisions and timing variables we need to consider with regard to setting up a safe harbor 401(k) plan?
Back in the old days (and by “old days,” we mean prior to 2020), the timing requirements for setting up a safe harbor 401(k) plan were fairly restrictive. However, thanks to the SECURE Act, which was signed into law at the very end of 2019, you now have more leeway in deciding if going safe harbor is right for you. Just how much leeway depends on the type of safe harbor plan you wish to adopt. More in that in a minute. But first a quick recap.
Background on Safe Harbor 401(k) Plans
The safe harbor 401(k) plan design allows companies to, in essence, buy their way out of some of the annually required nondiscrimination tests, such as the ADP test and top heavy determination. In short, if the company agrees to make a minimum level of contribution to all non-highly compensated participants (and optionally, the HCEs as well), it gets a free pass on these tests even if the plan would otherwise fail them.
There are generally two variations of the required company contribution – a match option and a nonelective (a/k/a profit-sharing-type) option.
- Match. The minimum required formula is 100% of the first 3% each person defers plus 50% of the next 2% each person defers. That yields a maximum match of 4% of pay for anyone who defers at least 5%. To streamline things, some companies choose to match at the rate of 100% of the first 4% deferred.
- Nonelective. This option carries a flat 3% of pay contribution for everyone who is eligible for the plan, even if they choose not to defer for themselves.
Both versions must be immediately vested.
Plans that include an automatic enrollment feature that meets some additional requirements can apply a 2-year vesting schedule. These plans also have a slightly less expensive safe harbor match formula at 100% of the first 1% deferred plus 50% of the next 5%, for a maximum matching contribution of 3.5% of pay.
Timing Is Everything
Now, back to your question on timing. Even though the SECURE Act relaxed things somewhat, there are still some limitations to keep in mind, and those limitations vary depending on whether you are going with the match or the nonelective contribution. The match is pretty straight-forward, so we will start there.
Safe Harbor Match
If you already have a 401(k) plan in place, the only time you can add a safe harbor match is prospectively, at the beginning of a future plan year. If you don’t have a plan or if you have a profit-sharing-only plan (i.e. no 401(k) deferrals), you have some more flexibility. The safe harbor feature can still only be implemented on a prospective basis, but you can add it for the current year as long as it is in place for at least 3 months of the year. In other words, it must be established no late than October 1st of the current year (assuming a calendar year plan). These are the same timing requirements that applied to all safe harbor plans prior to 2020, and they remain in place for safe harbor match plans.
Safe Harbor Nonelective
Here is where the new flexibility comes into play, and it even includes a retroactive option. You can choose to implement the safe harbor nonelective contribution for the previous year (2020, in this case), the current year (2021), or next year (2022).
- Previous Year. You have until the last day of the current year to retroactively add a safe harbor nonelective provision for last year. That means you can wait until you have the actual test results in-hand before making your decision! Let’s put some actual dates to that. For the 2020 plan year, you have until December 31, 2021. There is one small catch, however. The required contribution for the 2020 plan year bumps up to 4% of pay rather than the usual 3%; however, it drops back down to 3% for 2021 and future years.
- Current Year. For the current year, the date to watch is December 1st (or the first day of the twelfth month for non-calendar year plans). If you add the safe harbor nonelective provision to your existing plan any time from January 1st through December 1st of this year, the standard 3% of pay formula applies. If you need to postpone the decision beyond December 1st, no problem. The “previous year” rules mentioned above apply. That means you can add safe harbor at 4% of pay for the 2021 plan year any time from December 1, 2021 through December 31, 2022.
- Next Year. If you are looking ahead to next year, you have loads of flexibility. In order to stick with the 3% of pay safe harbor contribution for the 2022 plan year, you have until December 1, 2022 to implement it. If you are ok going up to 4% of pay, you have all the way until December 31, 2023, to add safe harbor for the 2022 plan year.
Keep in mind that this new timing flexibility only applies to plans that use the safe harbor nonelective contribution. For those that prefer the match, the safe harbor feature is still limited to being effective on a prospective basis, and generally only at the beginning of the year.
Implementation and Participant Communications
If you are starting your plan from scratch, the safe harbor provisions can be included in the overall plan document. However, if you already have a plan, an amendment is required to add the applicable provisions. The amendment must generally be signed by the dates described above.
In addition, each participant who is eligible for the plan must receive a formal notice that describes the safe harbor provisions no later than 30 days before the provision is effective. Although the SECURE Act limited the notice requirement to plans that have a match, the fact that many safe harbor nonelective plans also permit additional discretionary matching contributions means that they are still required to provide the notice. The safe harbor notice, which is often prepared along with the plan document or amendment, must also be provided to participants 30 – 90 days before the start of each subsequent plan year.
Add all of that together, and it is generally recommended that you allow 30 to 45 days before your preferred effective date to get all of these ducks in a row so that you can roll out your shiny new safe harbor feature smoothly.
There you have it! Thanks to the SECURE Act, you now have up to an additional 15 months to implement that safe harbor nonelective feature. Have additional questions about safe harbor plans? Check out the Safe Harbor 401(k) Resources page on our website, or better yet, give us a call and we’ll be glad to talk through it with you.